]]>Free is not a sustainable business model. Everyone knows this, especially those who lived through the dot-com bubble 15 years ago. Everyone, it seems, except for cloud storage investors. Billions of dollars have been poured into cloud storage companies that are giving away their product, with just a tiny sliver of their customer base actually paying for anything.

Offering a free version of your product is nothing new for technology companies, but those who are successful at using this model either give the customer a strong incentive to upgrade to a paid version, or they do as Google has done and create a massive audience that can then be sold to advertisers. The most popular and heavily-financed cloud storage companies do neither.

Venture capitalists have invested more than $400 million in Box, a cloud storage file sync and share company, and assessed its value at $1.2 billion. Its much delayed IPO ultimately did better than anticipated, pricing above the expected range — even though only about 10 percent of its customers pay anything at all. Unlike Box, Dropbox is not a public company and has never filed for an IPO, so its financials remain private, but it has raised $1.1 billion in financing, $500 million of which is debt, and is valued at around $10 billion. It too has said that most of its customers use the free product.

Mission: Converting users to customers

With Box, a free personal account provides 10 GB of space, plus the ability to sync and share files with other Box users. Similarly, Dropbox offers 2 GB of free space, with the potential to earn up to 16 GB by referring new customers. Just 1 GB of storage will hold more than 15,000 Word documents, on average, and more than 300 images.

Ideally, the free product offers not only enough value to spread virally, but also offers a strong incentive to upgrade so that it sells itself. Unfortunately for Box and Dropbox, the free services more than cover the needs of customers, which is why it should come as no surprise that about 9 in 10 of Box’s customers don’t pay, according to its SEC filings.

What’s more, Box is paying about as much money as it makes to win those paying customers. For the nine month period that ended Oct. 31, 2014, Box brought in $153.8 million in revenues, while spending $152.3 million on sales and marketing alone. Its total net loss for the nine month period was $129 million. If Box has to spend almost everything it makes from current customers to win new ones, what is the use of giving its product away for free, aside from boosting the size of their user base to impress investors? After all, the entire purpose of giving the product away is to introduce people to the product and then entice them to buy. Simply put, Box went public because it had no other choice. It needed another big cash infusion to pay for its losses.

Dropbox’s financial results are not public, but given how similar its model is to Box’s and how much more money Dropbox has raised, there’s little reason to believe that they are significantly different. After all, the more money a company raises, the more of the company the founders have to sell, and no founder enjoys parting ways with equity. The only reason for Dropbox to raise that much money is because the company needs it.

Why pay if you don’t have to?

The marketing value of “free” is minimal in terms of real dollars if very few of those users convert to paying customers. And, more importantly, Dropbox and Box still have to support all those non-paying customers. There is simply no palatable way for them to eliminate free users, and the costs associated with them will continue to rise as the need for storage increases. As more free customers are added into the system, those costs continue to grow, creating a death spiral. Last year, in an effort to increase the number of paid customers, Dropbox reduced the price of a gigabyte of storage by 90 percent. That is a clear indicator that, over time, the price of cloud storage will continue to reduce to zero.

Eventually, these competitive pressures will likely force Dropbox and Box to invest heavily in building their own storage clouds, but that’s a losing game as well, as Nirvanix discovered much to its chagrin last year. Nirvanix had raised $70 million to build a storage cloud to compete with Amazon, Azure and Google. It sealed big partnerships with IBM and Dell, and had won customers like NASA, Fox Sports and National Geographic. But in the end, Nirvanix couldn’t keep up in the ruthless price war between the bigger, commodity cloud storage giants. When Nirvanix abruptly announced it would shut down, customers had mere weeks to move terabytes of data out of their system.

Eventually, investors will cut off the spigot, and, unless they change course, companies like Box and Dropbox will die like Nirvanix.

So, how can these free sync-and-share companies avoid disaster? The most likely scenario is acquisition by a large software or systems vendor who would ultimately integrate this sync and share functionality into their own products as a major feature. To thrive as independents, however, sync and share companies will need to do two things: move beyond a business model built on free and create a more robust and valuable product offering.

It’s not that sync-and-share isn’t valuable — it is! I personally use Dropbox almost every day. But sync-and-share is quickly shrinking from a stand-alone product into just one feature of a much larger integrated workspace. If these companies can create a compelling service that integrates communications, collaboration and project management into a single, intuitive environment, they may have a future. Box is clearly already moving in that direction, but both companies will need to do much, much more if they’re going to win against companies like Slack and their numerous competitors and outpace their own prodigious burn rates.

Finally, these new products will need to provide ample incentives for customers to pay. Having a lot of “customers” that don’t pay you anything is the surest way to repeat a lesson we were all supposed to have learned after the dot-com bubble burst. That lesson was painful enough the first time, and there should be no need to repeat it.

If you’re interested in assessing how and when a given data technology — deep learning, machine intelligence, natural language generation — can move from the theoretical to commercial use, Hilary Mason may have the best job around. This week’s guest, the CEO and Founder of Fast Forward Labs, talks about how that startup taps into a wide array of expertise sources– from academic and commercial research, the open source world to “outsider art” in the realms of spam and malware, to come up with new ideas for applications.

One natural language generation (NLG) project, for example, lets a person who wants to sell her house, enter the parameters — square footage, number of rooms etc — then step back to let the system write up the ad for that property. (As a person who makes her living from writing words, all I can say is: “ick.”)

She’s also got an interesting take on opportunities in the internet of things — a term she dislikes — and why the much-maligned title of data scientist has validity. Mason is really interesting so if you’re pressed for time, check out at least the second half of this podcast. And to hear more from her, be sure to sign up for Structure Data in March, where she will return to speak in March.

]]>If you weren’t already worried about the security of your company’s internal memos and other documents, the recent Sony hack probably fixed that (and reinforced the message that if you don’t want egg on your face, you shouldn’t write embarrassing emails).

Here’s the thing: Security is hard, and as we’ve heard over and over, it requires a mix of technologies from different providers, constant vigilance and good end-user practices to safeguard a company’s crown jewels.

Thanks to widely publicized breaches at Target, Home Depot and — yes — Sony, companies are reconsidering their security practices, according to a new research note from Nomura Securities analyst Frederick Grieb. That means more budget will flow to security next year and also that top-notch Chief Information Security Officers (CISOs) and Chief Security Officers (CSOs) with expertise in both relevant technologies and their company’s business and regulatory requirements are in short supply.

Lesson: Add your own security

In that vein, the director of security for a Fortune 100 healthcare provider recently told me that keeping company data and documents secure, requires that companies layer additional security atop whatever cloud storage and file share service is used. These storage vendors may have good marketing statements, but when you drill down, not very good security stories, he said.

Speaking on the condition that neither his or his company’s name be disclosed, he said the issue for a highly regulated company like his is to ensure that a document — whether it’s a PDF file of a doctor’s report or a digital X-ray of a broken arm — is protected not only at both ends (“at rest”) but also in transit (“in motion”).

That’s because the basic problem of the internet is that traffic goes through any number of third parties. “You don’t know and you can’t trust that your file is private — it’s like sending a postcard in the mail — anyone can read it,” he noted.

To address this, his company is deploying fan-favorite Dropbox but is also using a third-party product, nCrypted Cloud, to encrypt files before they’re sent, which leaves the encryption keys in the hands of the customer. The cloud storage provider, whether it’s Dropbox or Box or Google Drive or Microsoft OneDrive does not hold those keys and cannot access the files or disclose them to third parties. (Neither does nCrypted Cloud, which competes with WatchDox and Sookasa, for that matter),

He’ s also trying out a new nCrypted Cloud product, Infinite Mail, that strips out attachments embedded in messages, and replaces them with secure links that the intended recipient can open as set up by an IT administrator. It supports popular Microsoft and Google email products.

If the problem of secure mail can be solved, this security exec sees possibly huge perks down the road. Currently, the cost of printing and mailing reports and benefits documentation is humongous — it can cost a company like his up to $100 million a year. If there is a way to guarantee secure digital delivery of such documents to the right end users, the cost savings could be huge.

]]>Former Box CIO Ben Haines is now VP of corporate applications & platforms at Yahoo Yahoo, a gig he apparently started in November, according to his LinkedIn profile, which was spotted by the folks at CIO Journal (registration required).

Prior to Box, Haines held the same position at Pabst Brewing Co. — at which time Gigaom booked him to appear on a CIO panel at Structure 2013 — I mean who doesn’t want to hear about the tech underpinnings of Pabst Blue Ribbon? But by the time he stepped onstage he had already been named Box’s first-ever CIO.

It’s worth noting that the other Structure CIO panelist two years ago was Ralph Loura, then the CIO at Clorox but he has since moved on to HP. There is clearly no lack of career opportunities for CIOs these days.

For a little trip back in time, a video of that panel in which the speakers touched on the whole CMO vs. CIO meme, is linked below.

[youtube https://www.youtube.com/watch?v=1aC0HMknQs8]

Note: This story was updated soon after posting to reflect that Haines was not named CIO of Yahoo. Former Netflix exec Mike Kail holds that title. Kail is now being sued by Netflix.

]]>Dropbox and Microsoft both offer free or near-free storage to customers. But now they’re making it easier for Microsoft Office users — especially those who use Office for iPad — to keep using Dropbox storage, which might seem counterintuitive since Microsoft pushes its own OneDrive as its repository of choice for Office users.

In a partnership reported by The Verge Tuesday, Kirk Koenigsbauer of the Microsoft Office Engineering team said that Dropbox access was a key wishlist item for iPad for Office users. Accordingly, the Dropbox icon will show up next to Microsoft’s OneDrive icon on the iPad for Office screen. The deal appears targeted at mobile Office users, not the more traditional, desk-bound knowledge workers who tend to use Word and Excel in their offices.

In return, Dropbox will encourage its users to turn to Microsoft Office applications to edit and create their documents in the first place. Microsoft has another alliance with Box to ease co-existence of Office 365 and Box cloud storage and file sync software.

Microsoft, under new CEO Satya Nadella, is steering a tricky course between pushing its own applications against rival ISVs and wooing those ISVs over to use Microsoft Azure and other resources.

Dropbox and Box, both of which started out as cloud storage and file sync-and-share companies that work with everyone’s applications, are both trying to broaden their reach and turn their products into more of a “platform” for third parties. That’s because nearly everyone, from Apple to Google to Microsoft, now has their own cloud storage-and-sync story to sell.

It’s not as if Box is a stranger to acquisitions. It purchased Crocodoc, which became the basis of file-preview features, and Folders, a French company with technology that lets Box users open up multiple file types on their iOS devices. It also bought technology from dLoop, a small machine learning specialist, in January.

Last week on the Structure podcast, Box CEO Aaron Levie (pictured above) referred to the $150 million in funding when asked about the status of Box’s IPO. “We obviously filed at a unique time early in the spring, when a market correction occurred that made it less desirable to go out and be public,” he said. “We ultimately raised $150 million in additional capital that allows us to invest in the business and grow it at the rate we’ve been working on.”

Illtchev will report to Box’s co-founder and CFO Dylan Parker.

For Levie’s podcast, chat check out the link below — he starts at about minute 15.

]]>Add Pivotal to the list of tech players adding mobile services to its development platform.

Last week, the company announced Pivotal CF Mobile Services — which aims to enable developers to build push notifications into their applications; an API gateway to let them incorporate an array of third-party services; and data synchronization to give those apps access to lots of data types. The service, which builds on the Pivotal acquisition of Xtreme Labs last year, will be available sometime this quarter.

Since mobile-first development now is the rule of the land, every company that offers a development platform is scrambling to add — or acquire — services that help developers build smartphone or tablet apps more easily. As Gigaom reported last week, any major IT player that has not already done so will likely outline its mobile dev plan sooner rather than later.

Gigaom Research Analyst MSV Janikiram has a good tutorial here on what developers need to look for in a mobile platform

Aaron Levie on the Structure Show

Always a good interview, Box CEO and Co-founder Aaron Levie was a good sport again this week — subjecting himself to questions about the company’s planned IPO and ability to joust with giants on this week’s show. Cliff Notes version: Box is about more than file share-and-sync and suits companies that don’t want to lock into one software provider or OS. Levie’s segment starts at about minute 14.

]]>Box Co-founder and CEO Aaron Levie came on the Structure Show this week to talk about his company, the competitive landscape, and some recent trials and tribulations with the public market. Levie is s smart guy and an engaging interview, so read these highlights and then listen to the whole thing to hear his thoughts on everything from the API economy to how APIs might remake the economy.

“There was a little bit of a market correction that occurred that made it probably less desirable to fully go out and be public,” Levie said, noting that he’s still limited in what he can say because the company is still in a pre-IPO quiet period. Still, he added, Box was able to raise $150 million after it delayed the IPO in order to keep on growing.

For the last time, Dropbox isn’t in the same league — by design

“In reality, there’s sort of two markets. There’s the file synchronization and sharing part of the market, and we’ve obviously invested quite heavily in that part of our business — we’re often seen as an enterprise leader in that space — but the big opportunity, I think the big market that we’re going after is what used to resemble the traditional content management and enterprise collaboration market,” Levie explained.

He’s more concerned with replacing the old SharePoints and Documentums of the world with something new, that lets them manage their content in a way designed for the 21st century business lifestyle. It’s necessary, he said, because even a would-be dangerous competitor like Microsoft still hasn’t integrated SharePoint with its cloud-storage offerings, which means there’s an opportunity for a company that has a more integrated service and vision:

“What we saw pretty early on was that the economics in this space were going to be very challenging in the consumer side of the business because at some point in the curve consumers would be able to get free and infinite storage from one the big technology incumbents. But in the enterprise market, the theory was that actually the more devices, the more locations you shared from, the more people that you needed to work with, would actually introduce more and more complexity for the enterprise, and that would actually mean there was a massive opportunity to build very differentiated software to help companies manage their data.”

On turning content into a competitive advantage

Box bought a small machine learning startup called dLoop in December 2013, and began talking about how the technology could help it make more sense of metadata and generally make content-management a more intelligent experience. Here’s Levie’s take on what’s coming down the pike from Box will in this area:

“If you think about this category as hard drives in the cloud, then nothing really gets smarter about our information, nothing gets smarter about our work process. If you start to imagine, ‘Well, what could you start to do if you knew more about the user, if you you knew more about the data, if you knew more about what the user wanted to do with the data in relationship to the people you share with, or the security policies of their company,’ then you actually begin to reimagine in a way that makes business more fluid, in a way that makes people more productive. And I think more of what we’ll be talking about at BoxWorks is how you can actually begin to compete in new ways with your information, and how you can actually change and transform a lot of these processes.”

Levie at Structure 2012. Photo: Pinar Ozger / pinarozger.com

Is there a hub in the SaaS world, or just a lot of well-connected spokes?

“We used to have this notion of the hub, it was the ERP system or was kind of the main corporate database, or the Active Directory system,” Levie explained. “I think that notion is actually evolving, where if you think even about your own personal experiences with technology, less and less there’s actually a hub. There’s different services that you use for specific problems, that happen to overlap and connect to the other services that you use. So there’s not any one controlling paradigm or service for all of those experiences. … I think the enterprise is going to be more and more similar to that model. “

What that means is businesses might use Box to manage their content, so, ZenDesk for helpdesk support and something else for some other process. Each of those companies will have its own ecosystem of partners, but will also integrate with the others meaning customers no longer need to bet the farm on a single vendor’s suite of products.

“And I think that’s just the changing paradigm of enterprise software that many traditional kind od IT leaders, and especially the incumbents in the technology space, are still kind of wrapping their minds around and trying to to figure out how you adapt to that,” Levie said.

It’s a potentially revolutionary time in Silicon Valley

“The Valley is at this really interesting moment in time where if, as a snapshot, you look at what was announced at YCombinator’s demo day [recently] — you have nuclear energy, you have new genomic startups, you have new biotech emerging,” Levie said. “I think we are starting to see the viability of these new business models in sort of non-software, or at least not traditionally software-defined markets … [I]t means we have the metaphors, we have the sort of precedent for what will mean to do interesting stuff with robotics, with artificial intelligence, with new bioinformatics.”

Most observers would say Box is in a tough spot. Microsoft, Google and now Amazon have barged onto its turf of business-focused file sync, share and management. That’s got to be worrisome even if some of those services aren’t as slick as Box’s.

This week’s guest, Box co-founder and CEO Aaron Levie, acknowledges the concern, but maintains that Box’s ability to work across operating systems, devices and applications, makes it more able to meet user requirements — what a concept — than the big platform guys that have other agendas — like locking users into using more of their stuff. The API economy makes it possible for more focused and innovative companies to build products that integrate with other applications users want. We also ask what’s up with the Box IPO. (Hey, it’s our job.)